By Eldon Mast, on December 21st, 2009
Earlier, we looked at what the current “dead cat bounce” meant for the Dow Jones Industrial stock index, but with a strong late Friday rally, Nasdaq Index returns have been even more impressive.
Up nearly 75% since the March 10th trough, the tech laden index spiked up another 1.5% on Friday, to close up almost 950 points since its late winter low…
(click to enlarge chart)
 Source: Google FinanceEarlier in the week the Philly Fed factory survey registered activity at a 4-1/2 year high. Activity accelerated rapidly in the U.S. Mid-Atlantic region in December the survey showed. “This will mitigate concerns that the factory sector might be slowing,” said Tony Crescenzi at PIMCO. With the mounting reports of a jobs rebound, the stock market equity gains, and these business climate improvements, US retail consumers will likely be in a merry mood for the final week of Christmas shopping.  Join the forum discussion on this post - (1) Posts
By Dan McLaughlin, on December 21st, 2009
Many decades ago, George Orwell wrote a book called Animal Farm. It used a farm as a metaphor for society and depicted the transformation of a productive enterprise into a totalitarian regime. The progress toward dictatorship took small steps that were held to be in the best interests of “the people.” Equality of conditions was affirmed as the highest ideal. The redistribution of wealth from the productive led to universal dependency and slavery, which are the ultimate end results of socialism.
There is no universal definition of socialism, so it may be helpful to state mine here. It is the idea that individual rights are subordinate to the good of society, as determined by those in power. The varieties of socialism only diverge over the degree of suppression of which particular rights.
The key phrase from the book, one that resonates so clearly today, is “All animals are equal, but some are more equal than others.” When it is all said and done, equality is only for the peons, the lesser folk, the non-intellectual, non-wealthy proletariat. The political leaders, the elite, represented in the book by the pigs, are above equality. They proclaim that they need their wealth and power to do what is good for society. As Dr. Evil of Austin Powers fame would mockingly say, “Riiiiiiiiight.” The most influential promoters of socialist ideals are fabulously wealthy. They have vast opportunities to put their money where their collective mouths are. Yet, those selfless acts of mercy are strangely absent.
Paul Krugman, a high profile New York Times columnist, is a so-called economist who, in spite of being an economics professor, actually rejects all economic principles in favor of demagoguery and ideology. Last year he was awarded the Nobel Prize in Economics by the unabashedly socialist central bank of the socialist, egalitarian country of Sweden. One of his hot topics is income inequality and he decries the large salaries of corporate executives, yet he has no conscientious objection to accepting $50,000 for a speaking engagement or a million dollar Nobel award. With his salary, consulting, speaking and sales of best selling books, he earns many multiples of the average income. He does not, however, volunteer to donate all of his excess to those who are under the average. Might that call into question his egalitarian motives?
George Soros is a multi-billionaire, who earned his wealth from free market capitalism. He has become a leading voice in international socialism and is putting together a panel of socialist economists to develop a “new economics.” Included on the panel is Joseph Stiglitz, another wealthy Nobel Prize winner in economics. He also happens to be on an advisory board to the Socialist International, called the Commission on Global Financial issues. Soros has committed $50 million to establish the Institute for New Economic Thinking. Rather than donating his billions to the poor all over the world, he instead, finds it appropriate to use his incredible influence to promote redistribution schemes for you and me and anyone not lucky enough to be one of the exalted elite.
Redistributionist President Obama and his wife Michelle both had high paying jobs before the presidency, and made millions on best selling books. Did they redistribute their own excess to the less fortunate? No, they lived instead like wealthy capitalists in their $1.6 million dollar home. At one time, he worked with the radical socialist ACORN organization, learning the Saul Alinsky method of community organizing, igniting division and agitation and fanning the flames of victim mentality. As president, he has a stable full of wealthy socialists and international bankers, who have no qualms about taking away your rights and redistributing your income.
We are at a dangerous crossroads. American government in all branches has become infected with socialists who would like nothing better than to see our nation crumble. They would replace our constitution, based on freedom and the rights of every individual, with the United Nations Declaration of Human Rights, which is an appropriate statement of rights for the former Soviet Union or the present North Korea.
The Orwellian “pigs” are taking over the farm. We, the people, are cheering them on. If we continue down this road, there will come a time when we are disarmed and dependent on benevolent government bureaucrats. Dependency is slavery. That is what socialism is all about. It is no surprise that many influential people tend to support socialism and “spreading the wealth”. They are, after all, the pigs who are “more equal.”
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By Rok Spruk, on December 18th, 2009
Dani Rodrik offers a nice insight into one of the most remarkable theorems in international trade (link).
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By Ajay Shah, on December 18th, 2009
Andhra Pradesh was once seen as a state with good governance by Indian standards. In recent years, the problems seen with Satyam, attempts to harass Nimesh Kampani, etc. have led many to question the quality of governance in Andhra Pradesh. Today, John Elliott has an important article in the Financial Times on the difficulties of Andhra Pradesh.
I took a look at the CMIE data on investment projects outstanding to measure the share in the investment projects at hand in India. I found that the action was strongest in state-wise data for projects which were `Announced’ (and not `under implementation’). The two states with the biggest decline in the share in India were West Bengal and Andhra Pradesh:
|
Andhra Pradesh |
West Bengal |
| Jun ‘08 |
7.46 |
8.00 |
| Sep ‘08 |
6.43 |
7.31 |
| Dec ‘08 |
7.15 |
8.19 |
| Mar ‘09 |
6.20 |
6.48 |
| Jun ‘09 |
6.29 |
5.71 |
| Sep ‘09 |
5.43 |
5.56 |
For Andhra Pradesh, the decline over this period was 2.03 percentage points and for West Bengal, the decline was 2.44 percentage points. These are the two biggest declines across all the states in this period.
All these values are a far cry from the biggest share of Andhra Pradesh ever seen — which was 18.53% in December 2001, when Chandrababu Naidu was chief minister. For a comparison, the peak share seen for West Bengal was 8.25%, which was in March 2008, when the CPI(M) was still a part of the UPA; we can vividly see the decline from that point to 5.56% in the latest data. The full time-series for all states are here.
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By Eldon Mast, on December 18th, 2009
FedEx reported Thursday that it shipped 1,000,000 more packages than expected on Monday — which it anticipates will be its peak shipping day this holiday. The firm reported that this year’s busiest day is up 17% from its busiest day last year.
FedEx CEO, Fred Smith further observed that their business has now observed a significant “turning point,” and that the company will resume some normal human resources benefits that it had suspended for employees in 2009.
 “Global economic conditions are improving,” Smith said in an investor conference call Thursday. Executives went on to cite their outlook for “modestly improving economic conditions.” Because of those improvements, FedEx said it will restart merit salary increases and resume its retirement-plan matches for those employees who participate in their 401(k) program. Both policies had been put on hold.FedEx is among a growing list of companies that are lifting freezes on raises and expense control measures that were imposed during the recession. According to a survey by Watson Wyatt — a benefits and human-resources consulting firm — about half of all large U.S. companies that froze salaries for 2009 plan to unfreeze them for 2010, and over a third of companies that reduced 401(k) matching contributions plan to restore them in 2010.
FedEx’s comments further confirm “very good signs ” for retailers this holiday season and their results will be far from lackluster as many economic pundits had widely predicted earlier this year.
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By Winton Bates, on December 17th, 2009
In an earlier post I suggested that there would be widespread agreement that a good society would provide members with a degree of personal economic security against potential threats to individual flourishing, including misfortunes such as accidents, ill-health and unemployment. (See: What are the characteristics of a good society?)
In suggesting that there would be widespread agreement about this I had in mind that nearly everyone would tend to be somewhat risk averse if they had to choose what kind of society to live in without any knowledge of their own personal circumstances. Rather than focusing exclusively on the median (or most likely) outcome of their choice I think nearly everyone would have some regard to what their quality of life might be like in various societies if they were to draw the short straw in terms of parentage, health, intelligence, good looks and good luck. (How people would actually respond to such a thought experiment is an empirical question. I recall reading somewhere that John Rawls’ difference principle has not been supported by empirical research, but this principle seems to assume extreme risk aversion applies to choices made behind a veil of ignorance. If any readers are aware of useful empirical research on this question I would be grateful to be made aware of it.)
It seems to me that the average income of people at the lower end of the income distribution is an appropriate measure of economic security because it relates directly to the quality of life that people are able to lead. This can be estimated for a wide range of countries using survey data on the percentage of national income or consumption of people in the lowest 10 percent of the income distribution. Another relevant indicator is survey data on the proportion of the population that have at times not had enough money to buy food that their family needed in the preceding 12 months.
The following table shows countries ranked by the average income level of people in the lowest 10 percent of the income distribution. Percentages with not enough food are also shown along with a range of other indicators of average well-being and institutional quality. As in similar tables in recent posts, the ratings of countries with performance in the top quartile for each indicator are shown against a green background, those for the second quartile are shown in yellow, the third quartile in orange and the fourth quartile in red. Indicators are defined below the table.
As would be expected, countries which rank highly in terms of average incomes of the bottom 10% tend to have the lowest percentage of people who claim that at times they did not have enough money to buy food. There are some interesting anomalies, however, at both ends of the spectrum. For example, the percentage claiming that they did not always have enough money for food were higher than would be expected in several high-income countries including the UK, Italy, Australia and New Zealand. Low-income countries in which the percentage claiming inadequate money for food was lower than expected included Nepal, Vietnam and India.
The table shows that average incomes of the bottom 10% of the population depend strongly on the goose that lays the golden eggs – i.e. on the institutional factors that determine average income levels of the whole population. I do not intend to imply, however, that democratic institutions and income redistribution policies of governments play no role in supporting incomes of the bottom 10%. A regression analysis suggests that democratic institutions do tend to support average income levels of the bottom 10% of the population. Examples are evident in the table. Countries in which relatively low ratings on ‘Voice and accountability’ may help explain lower than expected incomes of the bottom 10% include Iran, Tunisia and Argentina. Countries in which relatively high ratings on ‘Voice and accountability’ may help explain higher than expected incomes of the bottom 10% include India and Mongolia.
Hint: Click on the table for a clearer picture.
Notes:
Income index for the poorest 10%: Index expressed as a fraction of estimated average income of the poorest 10% of families in Norway, the country in which the poorest 10% have the highest average income. Estimates based on share of income/expenditure of the poorest 10% of the population from Table M, HDR 2009 Statistical Tables, UNDP.
Not enough food %: The proportion of the population claiming that at times in the preceding 12 months they have not had enough money to buy food that their family needed. Survey data from the Gallup World Poll.
Average income index: Real GDP per capita (rgdpl) for 2007 from the Penn World Table, expressed as a fraction of per capita GDP in the United Arab Emirates, the country with highest per capita GDP. Source: Alan Heston, Robert Summers and Bettina Aten, Penn World Table Version 6.3, Center for International Comparisons of Production, Income and Prices at the University of Pennsylvania, August 2009.
Voice and accountability: Index compiled by the World Bank capturing perceptions of the extent to which a country’s citizens are able to participate in selecting their government, as well as freedom of expression, freedom of association and a free media.
Economic Freedom (Fraser): According to the Fraser Institute’s definition, individuals have economic freedom when property they acquire without the use of force, fraud, or theft is protected from physical invasions by others and they are free to use, exchange, or give their property as long as their actions do not violate the identical rights of others. Data from the 2009 report (for 2007).
Control of corruption: Index compiled by the World Bank capturing perceptions of the extent to which public power is exercised for private gain, including both petty and grand forms of corruption, as well as ‘capture’ of the state by elites and private interests. Quality of life index: Gallup World Poll data on “life today” (latest available) country averages, expressed as a fraction of the rating for Denmark, the country with the highest rating.
Social capital: A sub-index of the Legatum prosperity index which reflects how well people are engaged in social networks and relationships that are trustworthy and supportive.
By Eldon Mast, on December 17th, 2009
On Wednesday, the Federal Reserve underscored that the U.S. economy is picking up steam but reassured observers that inflation is in check that that it will keep short-term interest rates near zero for an “extended period.”
In their statement after the meeting, the members concluded that the US economy has continued to “pick up,” that declines in the job market are “abating” and that in general financial conditions “have become more supportive of economic growth.”
Source: Google Images
Some members believe inflation is likely to remain so low that rate increases might not be needed until 2011.
The Fed underscored in its statement many of the emergency measures it has taken in the past two years were being unwound. In earlier discussions the Fed has indicated that it will begin to unwind other extraordinary accommodations prior to any upward rate moves:
“In light of ongoing improvements in the functioning of financial markets, the [FOMC] and the [Fed's board of governors] anticipate that most of the Federal Reserve’s special liquidity facilities will expire on February 1, 2010.”
By Trace Mayer, on December 17th, 2009
The COMEX has raised the margin requirements for gold and silver futures contracts. Additionally, gold is trading in minor backwardation but this is probably not serious. The margin requirement rise validates the strength of the bull market. There will likely be additional margin requirement increases during this upleg. 
MARGIN REQUIREMENT
A margin, or performance bond, is collateral that the holder of a position in futures contracts, securities or options has to deposit to cover credit risk. The use of margin greatly amplifies either the gain or loss with a position. The higher the margin requirement the more capital is required to control the same amount of the underlying asset.
One consequence that can result from using margin to purchase assets is a margin call. If the margin posted in the margin account is below the minimum margin requirement then the broker or exchange issues a margin call. The investor has to either increase the margin deposited or close the position and can be accomplished by selling the securities, options or futures if they are long and by buying them back if they are short.
If they do not do any of this the broker can sell his securities to meet the margin call. If the exchange is unsuccessful in executing margin calls and receiving enough capital then the exchange could fail.
The COMEX has recently raised the margin requirements for gold and silver contracts.
The result of these increases in the margin requirements will likely be somewhat bearish for the metals in three to six months. This is because it will require more capital to control the same amount of the commodity and will serve to dampen some of the speculative hot money which has been flowing into the metals lately.
Margin requirements and other exchange rules are what put a damper on the Hunt brother’s plans. Overnight the rules were changed without notice and it resulted in tremendous losses and margin calls to the Hunts. The effect of margin requirements on the instruments of the gold price suppression scheme does cause some questioning. For example, are they even subject to the requirements?
GOLD AND SILVER BACKWARDATION
As of 16 December 2009 there has been some minor backwardation appearing for both gold and silver. For example, gold for delivery in December 2009 was higher than the January, February and April contracts.
Likewise the LBMA silver forwards have been showing some particularly interesting activity since about 24 November 2009. For example, the SIFO for one month was higher than all other months on 15 December 2009. The 16th showed similar unusual activity. Silver only recently slippped out of significant and prolonged backwardation in June 2009.
This bout of both silver and gold with backwardation is likely minor or immaterial. With gold it is likely due to delivery considerations. With silver there would need to be a prolonged condition to merit much more attention. Either way this is a condition to observe. Backwardation in the monetary metals implies loss of confidence in the paper instruments and both the desire and ability to take immediate possession without the use of margin.
PRECIOUS METALS BULL
As the gold, silver and platinum precious metals bull continues gaining intensity it will gather in more capital. With their use as currency in ordinary transactions, through services like GoldMoney, it will continue to increase the percentage of the total market that is owned outright. Already, most physical gold bullion is owned outright without any attaching liabilities in jewelry, coin or bar form by either individuals or massive central banks. This adds stability to the market because when an asset is owned outright then the owner cannot be margin called.
By analogy one of the reasons the US residential property market, which is heavily purchased on margin, is in such dire straits is because of the constant ‘margin calls’, the surplus inventory which is put on the market after foreclosure which results in further declines in market prices and more margin calls. In contrast, real estate in Argentina is 93% owned outright with only 7% encumbered. This adds tremendous stability to prices.
The increase in margin requirements on the precious metals will only serve to strengthen the bull market. But in the short term the effect could be to depress the price because of margin calls to speculative hedge funds.
CONCLUSION
There is old advice that the market can remain irrational longer than you can remain solvent. But this advice applies if margin is used. Gold, silver or platinum that is completely paid for becomes sovereign wealth, cannot be margin called and therefore the owner can hold it indefinately without fear of insolvency. Unlike with a margin call there is no forced selling. Holding the monetary metals in such a way is in harmony with provident living principles and a safe way to buy gold.
DISCLOSURES: Long physical physical gold, silver, platinum and no position the problematic SLV or GLD ETFs.
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By Winton Bates, on December 16th, 2009
People who are familiar with Ayn Rand’s writings may consider the answer to this question to be obvious. Rand made no secret of the fact that she regarded selfishness as a virtue. So, why ask the question?
Having recently read “Atlas Shrugged” properly for the first time (rather than skimming through it) the heroes, including John Galt, Hank Rearden and Dagny Taggart, did not seem to me to be selfish. By the end of the book they had chosen not to live their lives for the sake of others and not to ask others to live for their sake. But this did not make them selfish in the sense of being deficient in consideration for others. Hank Rearden left his mother without means of support when he went off to start a new life, but it would be difficult for anyone who was aware of the way she repaid the kindness he showed her to argue that he had acted selfishly towards her.
Rand’s view that selfishness is a virtue follows from a narrow definition of selfishness as “concern with one’s own interests” and of individual happiness as the moral purpose of life. In the words of John Galt: “Happiness is the state of consciousness which proceeds from the achievement of one’s values” (p 1014).
Galt explains: “Happiness is not to be achieved at the command of emotional whims. Happiness is not the satisfaction of whatever irrational wishes you might blindly attempt to indulge. Happiness is a state of non-contradictory joy – a joy without penalty or guilt, a joy that does not clash with any of your values and does not work for your own destruction, not the joy of escaping from your mind, but of using your minds fullest power, not the joy of faking reality, but of achieving values that are real, not the joy of a drunkard, but of a producer” (p 1022).
Rand’s narrow definition of selfishness enabled John Galt to say: “This much is true: the most selfish of all things is the independent mind that recognizes no authority higher than its own and no value higher than its judgement of truth” (p 1030).
Why did Ayn Rand adopt a narrow definition of selfishness? She could have avoided a lot of confusion by using another term, e.g. “ethical egoism”, to describe the virtuous concern for one’s own interests and accepting the popular usage of selfishness to describe unethical behaviour that involves pursuing one’s own interests at the expense of others. I suspect that Rand adopted a narrow definition of selfishness because she wanted to draw attention to her opposition to the view that self sacrifice is a virtue.
The view that self sacrifice is a virtue was clearly one of Rand’s main targets. In John Galt’s words: “If you wish to save the last of your dignity, do not call your best actions a ‘sacrifice’: that term brands you as immoral. If a mother buys food for her hungry child rather than a hat for herself, it is not a sacrifice: she values the child higher than the hat; but it is a sacrifice to the kind of mother whose higher value is the hat, who would prefer her child to starve and feeds him only from a sense of duty” (p 1029).
By Thomas Knapp, on December 16th, 2009
I admit it. Back in the day (the day when I hiked and even did a bit of climbing, that is), I owned a couple of North Face™ shirts. I doubt they’re still around. If they are, I’ll find them and sock them away for a public burning if it comes to that. I sure as hell won’t ever wear them in public again, or buy another North Face™ product. And I’ll probably go out of my way to have a little discussion with any friend I notice wearing North Face™ rags.
In other words, I am (and have just announced that I am) negatively socially and economically preferencing* North Face™.
Here’s why.
Parody is clearly protected speech/commerce under US trademark laws. Even absent such laws, parody clearly does not constitute aggression, theft, etc.
South Butt™ is clearly parody. High school level parody, sure — it was in fact founded by a high schooler (he’s in college now) — but unmistakably parody.
Instead of taking the parody in good humor, or better yet taking up South Butt™ on its offer to sell, North Face™ decided to throw its weight around with churlish “cease and desist” demands and then a lawsuit.
North Face™ may “win” — in America’s “justice” system, being right and a pocketful of quarters will get you a cup of coffee from the vending machine in the hallway outside the courtroom — but they’re wrong. They know they’re wrong, I know they’re wrong, and now you know they’re wrong. They’re humorless bullies. So screw’em.
Even if they “win,” North Face™ has already lost. They’ve lost any and all future potential sales of their products to me and to anyone whom I have the opportunity/occasion to influence on the matter, yea unto the seventh generation, etc. (by which I mean, point your friends/readers at this post, please).
Negative social and economic preferencing does not strictly require an equal and opposite reaction (i.e. a matching positive social/economic preference), but in this particular instance I think one is justified. South Butt™ offers fun, attractive products at a reasonable price, and presumably buying from them will aid them in fending off the efforts of North Face™ to shut them down. I can always use a new t-shirt, and I expect I’ll get my next one from South Butt™. Consider yourself invited to go now and do likewise.
—–
Note: For more on social preferencing and other solutions (actually, a framework into which social preferencing and other solutions fit) to the problems of human interaction, see the writings of Paul Wakfer and Kitty Antonik Wakfer at Self-Sovereign Individual Project.
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